Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets, even if it is your own.”
He should know. Rothschild made a fortune buying in the panic that followed the battle of Waterloo against Napoleon.-Investopedia
Coming back home and to the present, the social and economic climate do not look positive, an unstable geo-political scene (with Donald J. Trump as the President of the United States), the looming increase in interest rates by the FED, the list goes on and on. One can say that 2016 has been filled with a lot of noise for the investor. Now its 2017 and we press on!
However, I believe that bad times give rise to good buying opportunities in the market. We should get excited when an otherwise good company has a sharp, but undeserved drop in share price. Instead of selling in times like these, you buy some more! Remember the firing of Nhlanhla Nene in December 2015 where they Rand got obliterated and the banking stocks got absolutely hammered? Guess what was one of the best performing sectors in 2016…yes Banking up a cracking 26.2% in a market that was basically flat after dividends.
One of the many important things when it comes to investing is the price you pay for the investment. In fact, this is probably the most important part- The relationship between price and value. It should be the starting point of any investment consideration. Here’s one way to look at at; is it not always a warm, fuzzy feeling to buy that home appliance or your favourite sneakers at a discount when shopping? No need to answer that fam we all know the answer!
The same should apply when you are buying assets that generate a return. The cheaper you buy the product, the more value it shall create for you.
Investing has to be based on reliable estimates of the underlying value of the investment. The level of conviction in the estimate of the underlying value should be great. If there is no conviction, the investor may react irrationally to noise from the market, as a consequence he might lose faith in his investment positions causing him to sell, just when a drop in price should have lead him to increase his position. Thus exposing the investor to destructive exercise of buying high and selling low! Do not be that guy fam!
Of course it is not easy to vary from public opinion, especially during the so-called bearish cycles. It can be quite lonely.
Warren Buffet says this; we simply attempt to be fearful when others are greedy and to be greedy when others are fearful.
It is this sort of unconventional thinking that will bring you investment success. The ability to not panic when everyone is panicking and vice versa. This would mean maintaining unconventional positions against the general consensus.
Howard Marks says it best :
World affairs, economic and corporate performance will rise and fall in cycles. It is a never-ending pendulum that keeps swinging. Market participants also react to these events in a cyclical fashion. Therefore, price swings will usually overstate the swings in the underlying investment. When world events are positive and corporate profits are great, market participants feel good (greedy) and often bid investments at prices that overstate their underlying value. When world events are negative and panicky (fearful) market participants are prone to sell them at overly cheap prices, understating the underlying value of the investment.
These fluctuations due to world’s events, thus affecting investor behaviour, give rise to assets being sometimes offered at cheap prices and sometimes the prices are too high.
Sir John Templeton puts it quite nicely, Buying when others are despondently selling and selling when others are euphorically buying takes great courage but provides the greatest profit.